Fund manager's comment/Brian Gallagher
Negative newsflow regarding the economic slowdown in the US, accompanied by numerous earnings downgrades across a range of sectors, has undermined equity market performance in the past six months or so. However, we believe there are many stock-specific opportunities, especially those companies with a high proportion of earnings derived in the UK.
While the pace of house price inflation has decelerated in the past year, it remains relatively robust with 7% growth forecast by Nationwide for 2001. Job security remains high with the level of unemployment below one million for the first time since 1975. Meanwhile, real earnings continue to rise, with modest inflation failing to keep pace with average earnings since 1995. These effects combined to boost consumer confidence in March to its highest level in more than two years.
One of the main beneficiaries of this resilient consumer confidence has been the clothing and footwear sub-sector of the general retail sector. Data for the year to the end of April showed volume sales of clothing and footwear were 11.1% higher than a year earlier, the fastest rate of increase since 1986.
Food retailers have also performed well against the current market backdrop, partly due to their inherent defensive qualities, as investors have sought to reduce risk in their portfolios. Safeway recently reported results ahead of analyst expectations. The re-branding of a number of stores under the guidance of a new CEO is beginning to bear fruit and the chain is rapidly regaining lost market share.
The tour operators sub-sector has also strengthened this year as a result of improved consumer expenditure. Demand for overseas travel has increased with consumers looking to escape the restrictions of the foot and mouth outbreak and poor weather in the UK.
The dislocation of activity following the outbreak of foot and mouth disease has re-focused consumer spending patterns on urban activities instead. This 'substitution effect' has benefited areas such as gaming, with punters swapping horse racing for betting on other sports. In addition, other activities such as cinemas and health clubs have registered strong volumes. This has generated positive returns for stocks such as Hilton, boosted by its Ladbroke arm and its 'LivingWell' health and fitness clubs helping to drive 20% share price outperformance versus the market year to date.
Another stock in the sector that has generated substantial shareholder returns is De Vere, whose portfolio includes 27 hotels, a growing number of 'Greens' health and fitness clubs.
Given the likelihood that consumer confidence will remain buoyant in the coming months and the prospect of further interest rate cuts by the Bank of England, we remain positive on the prospects for UK equities.
l Consumer confidence should remain upbeat.
l Interest rate cuts should underpin equity market.
l Equities remain attractively valued.
Caring for children and elderly relatives
Similar to June 2007
Square Mile’s series of informal interviews
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